Unauthorized trading occurs when a broker buys or sells a security in an investor’s account without the investor’s prior approval. Unless the investor signs a formal agreement giving the broker discretion to manage the investor’s account without seeking prior approval for each transaction, the broker must follow rules designed to assure that the investor has, in fact, approved each transaction.
Industry rules require the broker to make a contemporaneous note of all of the particulars of the trade on an order ticket and read them back to the investor before actually placing the order. After the order is executed, the broker should call the investor back to reiterate the pertinent information, including the actual price at which the security was bought or sold. On the next business day, the broker must match up the information on the order ticket with the details of the actual trade on the firm’s internal records. The firm must then send the investor a confirmation within three days, after the trade actually “settles.”
Unauthorized trading can occur for any number of reasons. It occurs often in firms where there is a large incentive for the broker to meet commission goals, or quotas. Some firms, for example, have contests in which they give away trips or other perks to the broker who brings in the most commissions for the year. In other instances, the broker may be experiencing personal financial difficulties and is unable to resist the temptation to generate extra income without the investor’s permission. Whatever the reason, it is just another form of theft, plain and simple.
As an investor, the first line of defense against unauthorized trading is to examine the monthly statements and all of the confirmations carefully. If the investor thinks there are too many confirmations to have the time to look at each one, that is a sign that unauthorized transactions are occurring and that the account is being “churned,” or excessively traded (see related topic). Confirmations should be received within three days of the trade, and should have the details the investor agreed to — the name of the security, whether the investor bought or sold, the date, and the price at which the investor bought or sold. If anything seems wrong, call the broker to discuss. Do not accept any explanation such as “It was a typographical error,” or “We will correct it on the statement,” or even “I’ll make it up to you by giving you a free commission on the next trade.” If the broker is engaging in unauthorized trading in an account, the broker is probably doing it regularly.
An investor does not have to accept a trade that the investor thinks was placed based upon a misunderstanding. It is the broker’s responsibility to obtain unequivocal permission to make the trade, and any doubt must be resolved in the investor’s favor. If the investor is convinced the broker made an honest mistake, the investor should allow it to be corrected, but should receive a corrected confirmation or confirmation of the rescinded transaction. An investor should check monthly statements to make sure the appropriate transactions and corrected transactions appear there. If this kind of “honest mistake” happens more than once, the investor should fire their broker and consult with an attorney experienced in securities arbitration.
If you have investment losses or problems involving unauthorized trading, call the lawyers at Page Perry for experienced representation at (770) 673-0047 or (877) 673-0047 (toll free).